(1) Allow the appeal and set aside the orders made in the Equity Division on 10 October 2012.

(2) Answer the separate question –

The first respondent owed the appellant a duty to exercise reasonable care in the construction of the building to avoid causing the appellant to suffer loss resulting from latent defects in the common property vested in the appellant, which defects (a) were structural, or (b) constituted a danger to persons or property in, or in the vicinity of, the serviced apartments, or (c) made those apartments uninhabitable.

(3) Order the first respondent to pay the appellant’s costs in this Court.

(4) Direct that the judge determining the outstanding issues in the proceedings determine the proper order as to the costs of the trial of the separate question.

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court’s computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

Catchwords

BUILDING AND CONSTRUCTION – builder’s duty to subsequent owner – latent defects in common property – duty to owners’ corporation of commercial premises

STATUTORY INTERPRETATION – scope of duty of care under common law – responsibility of builder of commercial building – significance of statutory warranties with respect to residential building work

BASTEN JA: In August 1997 Chelsea Apartments Pty Ltd (“the developer”) obtained consent from Willoughby City Council to redevelop a property at 10-18 Railway Street, Chatswood. The general description of the development was:

“Demolition of the existing hotel and construction of a mixed use retail, restaurant, residential and serviced apartments building.”

The developer contracted with the first respondent, a company then known as Multiplex Constructions Pty Ltd, now Brookfield Australia Investments Ltd (“the builder”), to carry out the development pursuant to a “Design and Construct Contract” with a price in excess of $55 million. The development involved a 22 storey building, with two major components: floors 1-9 were to be serviced apartments and floors 10-22 were to be residential apartments. The developer also entered into an agreement with three companies in the Stockland Group pursuant to which a serviced apartment strata plan would be registered, so that apartments could be sold to investors, but continue to be managed as a “serviced apartment business” by one of the Stockland Group, Park Hotel Management Pty Ltd (“Park”). The developer was to retain ownership of the restaurant premises but was to lease the area to Park to sublease to a restaurant operator. (There was also an arrangement between the developer and Park as to the management of the car park.)

In 1999 a certificate of final completion was issued, the strata plan for the serviced apartments was registered and the appellant, The Owners – Strata Plan No 61288 came into existence. Contemporaneously, a strata plan was registered for the residential apartments, with its own owners’ corporation.

In November 2008 the appellant commenced proceedings in the Equity Division against the builder. (The reason for joining the second respondent, another company in the Multiplex Group, is obscure and the parties were content to ignore its presence for the purposes of the appeal.) The appellant filed a Construction and Technology List statement which noted that the claim was for defective building works and identified numerous defects in the common property said to have been discovered by the appellant in early 2004: par 32.

As the proceedings were originally constituted, the owners’ corporation for the residential apartments was also a party. In January 2005, both had made claims based on statutory warranties arising under the Home Building Act 1989 (NSW). By the time the proceedings came on for trial, the owners’ corporation for the residential apartments was no longer a party, its proceedings having settled. Also by the time of the trial, the appellant had conceded that it was not entitled to the benefit of statutory warranties under the Home Building Act. Accordingly, its claim was brought in negligence, under the general law, for pure economic loss.

The trial judge, McDougall J, determined that he should address as a preliminary question whether the builder owed a duty of care to the appellant as alleged. He held that it did not: Owners Corporation Strata Plan 61288 v Brookfield Multiplex [2012] NSWSC 1219 at [4]. As a result, he gave judgment for the defendants, ordering the appellant to pay their costs.

The present appeal is brought as of right, challenging the final judgment, albeit a judgment based on the answer to the separate question. For the reasons explained below, the appeal should be upheld and the judgment below set aside.

(1) A claim for pure economic loss

(a) identification of issues

The appellant had no contractual relationship with the builder: indeed, it came into existence under theStrata Schemes Management Act 1996 (NSW) only upon registration of the relevant strata plan, after the builder had completed at least its primary obligations under its contract with the developer. Nor was the appellant, due to the manner of its genesis, able to contract with the developer with respect to the benefits the developer might have enjoyed under its contract with the builder. Accordingly, once it was accepted that it did not obtain the benefit of statutory warranties under the Home Building Act, the appellant was limited to a claim against the builder in negligence for the defective work which it was obliged by law to rectify, acting on behalf of owners of the lots in the strata plan, which were the serviced apartments.

Accepting further that its claim against the builder was one for pure economic loss, the appellant needed to establish its entitlement under general law principles. Those principles must be applied in the context of statutory provisions governing its creation as an owners’ corporation and the statutory obligations imposed on those undertaking residential building work. It is convenient to commence with a consideration of the general law principles governing claims in negligence for pure economic loss. Against that background, it will then be necessary to consider relevant aspects of State statute law. (No federal law was involved.)

Secondly, the question as to whether there was a duty of care was addressed both at trial and in this Court at a high level of generality. It appears to have been assumed that, beyond identifying the claim as one for “economic loss”, it was not necessary to consider the nature of the alleged defects, except to characterise them as “latent”. Similarly, it was not seen as necessary to consider the basis upon which damages might be calculated, whether, for example, as the cost of rectifying the defects or diminution in the value of the building. The appellants’ claim was for the cost of rectifying the latent defects in the common property.

The trial judge noted that the duty relied upon was one “to take reasonable care to avoid a reasonably foreseeable economic loss to the [appellant] in having to make good the consequences of latent defects caused by the building’s defective design and/or construction”: at [18]. With respect to the meaning of “latent” the trial judge also appears to have accepted a description by senior counsel for the appellant, namely that at least some of the defects were “not susceptible or discoverable on reasonable examination (either by the [appellant], which of course had no opportunity to accept or reject the vesting in it of the common property, or by subsequent purchasers of lots)”: at [26]. A schedule of defects was set out at [65]. The trial judge noted an admission by senior counsel for the respondent in the following terms, at [67]:

“On the question of duty of care, my client is prepared to concede as to foreseeability that at the time of construction it was reasonably foreseeable that if there were defects in the building, some of those defects might be latent at the time of registration of the strata plan.”

(b) nature of defects

The trial judge referred to the fact that certain defects, for example steel lintels over windows, which were alleged to be “not hot-dip galvanised” and missing galvanised steel mesh, backing rods and sealant, had been concealed so that the defects could not be identified without removal of masonry and render, which in turn would have required the erection of scaffolding or a swinging stage. The trial judge then stated at [71]:

“Thus … if the defects alleged exist, then many of them are properly to be characterised as latent defects, not readily detectable by any reasonable process of inspection. I acknowledge that this assumes that, at the relevant time (which would be either when the common property vested in the Owners Corporation or, perhaps, when individual proprietors purchased their lots) there was no sign that would lead the reasonable mind to suspect the existence of the defect.”

It will be necessary to return to the question of reasonable inspection in considering the position of an owners corporation and the relevance, if any, of what might be reasonable inspection by individual proprietors of lots, in relation to defects in the common property.

None of the defects referred to in the schedule appears to have been structural. To take an extreme example, a latent defect which, when discovered, required evacuation and rebuilding on an extensive scale might invite different considerations to complaints that a lower grade of material had been used than that required by the contractual specification, thus creating a need for higher maintenance than would have been the case if the specification had been followed. Between those two categories of defect, there may be a third category, namely defects which create a risk of personal injury, for which the builder would be liable if it eventuated, and which the owner is obliged to take steps to prevent. An example of such a defect, listed in the schedule, was the external render which was said to be cracking at numerous locations. If (which was not explored) there was a danger that slabs would fall from the façade of the building, there might well be a risk of personal injury if the defect were left unattended. It might be thought surprising if the builder could be found liable for personal injury resulting from such a defect, but the owner could not recover the cost from the builder of remedial action to remove the risk. Different considerations arise with respect to work giving rise to a structure which is ‘shoddy’ or ‘faulty’, but not ‘dangerous’: Winnipeg Condominium Corporation No 36 v Bird Construction Co Ltd [1995] 1 SCR 85 at [36] and [47] (La Forest J).

(c) indeterminacy

Caltex Oil involved a claim by a terminal owner (Caltex) for the additional cost of transporting oil around the shores of Botany Bay, when the defendants negligently broke a pipeline used to transport the oil across the bay. The pipeline was not owned by Caltex, but by a third party. The High Court held that the economic loss suffered by Caltex was recoverable, although Caltex had suffered no physical damage to its own property: at 558,562 and 578 (Stephen J). As noted by Stephen J at 568:

“No doubt to discard the element of physical injury to person or property as a prerequisite to the recovery of damages in negligence means that its effect of tending to ensure that compensable damage is restricted to that which is immediately consequential upon the tortious act also disappears; there then looms the spectre, described by Cardozo CJ in Ultramares Corporation v Touche [174 NE 441, at p 444 (1931)] as that of ‘liability in an indeterminate amount for an indeterminate time to an indeterminate class’. However to counter this spectre by rejecting all recovery for economic loss unless accompanied by and directly consequential upon such physical injury is Draconic; it operates to confer upon such physical injury a special status unexplained either by logic or by common experience.”

Temporal indeterminacy can arise because a latent defect only gives rise to economic loss when the defect becomes manifest: Sutherland Shire Council v Heyman [1985] HCA 41; 157 CLR 424 at 503-505(Deane J); Bryan v Maloney at 626; Invercargill City Council v Hamlin [1996] AC 624 at 647-648 (PC per Lord Lloyd of Berwick); Winnote Pty Ltd v Page [2006] NSWCA 287; 68 NSWLR 531 at [361]-[362]. However, such problems are best addressed by imposing a limitation period on claims. If the right to recover is limited to defects which are structural or give rise to safety issues, delay in manifestation is less significant as a reason to deny a duty of care.

Indeterminacy of amount is usually a function of the indeterminacy of the class. In Caltex Oil, no such problems arose: the sole purpose of the pipeline (the existence of which was well known to the dredge and the surveyor) was to transmit oil to the refinery operated by Caltex. The problem would have been different had the disruption led to consequential harm. That issue is illustrated by the facts of Johnson Tiles Pty Ltd v Esso Australia Pty Ltd [2003] VSC 27. An explosion at the Longford processing plant operated by the defendant cut off virtually the whole supply of gas within the State of Victoria for a period of two weeks. Representative actions for damages in negligence were brought by three groups of plaintiffs against the defendants. The first group constituted business users, the second domestic users and a third workers stood down as a result of the closure of businesses. The smallest of the three groups, the commercial users, numbered some 43,000, which was held by the trial judge, Gillard J, to be a large but not indeterminate class: at [921]. Indeed, the domestic users who numbered 1.1 million were similarly characterised: at [936]. The stood down workers were held to constitute an indeterminate class: at [944]. (Such characterisations were not, however, determinative of liability: all classes of plaintiffs failed on the primary test of “vulnerability”.)

(d) vulnerability

A key mechanism for maintaining control over a potentially expansive area of legal liability is the concept of vulnerability. As McHugh J explained in Perre v Apand at [118]:

“In many cases, there will be no sound reason for imposing a duty on the defendant to protect the plaintiff from economic loss where it was reasonably open to the plaintiff to take steps to protect itself. The vulnerability of the plaintiff to harm from the defendant’s conduct is therefore ordinarily a prerequisite to imposing a duty. If the plaintiff has taken, or could have taken steps to protect itself from the defendant’s conduct and was not induced by the defendant’s conduct from taking such steps, there is no reason why the law should step in and impose a duty on the defendant to protect the plaintiff from the risk of pure economic loss.”

However, it is a concept which may mean different things in different contexts. Further, it should not be given more work than it can reasonably bear: if there are other principles at stake, they should be separately identified and applied. For example, arguably there should not be a disproportion between the nature of the conduct and culpability of the defendant and its exposure to make good losses suffered by others. Further, there is a need to avoid the imposition of liability for what may be described as “ordinary business conduct”: Perre v Apand, eg, at [335] (Hayne J). As will be seen, this consideration may be satisfied by requiring that a duty to a plaintiff in tort imposes no greater liability than that imposed on the defendant with respect to a predecessor in title or owner of affected property. Neither of these factors is helpfully characterized as an element of vulnerability.

There are other concepts which are sometimes treated as separate, but are best seen as included within the concept of “vulnerability”: for example, “assumption of responsibility” on the part of the defendant and “reliance” on the part of the plaintiff. To the extent that these concepts are not simply elements in the characterization of a relationship depending on other more specific factors, they reflect, for example, the inability of the plaintiff to protect itself from the loss incurred by reasonably available alternative mechanisms, such as loss insurance or limiting its own obligations under contracts of supply to its customers. The inability of a plaintiff to protect itself is an element of vulnerability.

The importance of vulnerability as a key factor in identifying the scope of a duty of care for pure economic loss was affirmed in Perre v Apand. The plaintiffs were potato growers, whose neighbours (also growers) obtained seed stock affected by bacterial wilt from the defendant. The farms were situated in South Australia, but the plaintiffs sold much of their produce in Western Australia. Regulations in that State prohibited importation of potatoes grown on land affected by the disease, and on any land within a radius of 20 kilometres. The High Court upheld the appellants’ contention that the defendant had owed them a duty of care. Three factors were critical in the Court’s analysis. First, the risk of injury to the interests of the plaintiffs was not only reasonably foreseeable by the defendant, but was actually foreseen: at [13] (Gleeson CJ). Secondly, plaintiffs were physically vulnerable in the sense that they had no control over the use of the land on which the affected crop was planted. Thirdly, the plaintiffs were not members of an indeterminate class, but one which was closely defined geographically; nor was the nature of the loss potentially indeterminate, being limited to the net value of a specific crop.

It is clear that in some cases, including Caltex Oil and Perre v Apand, the plaintiffs will have neither physical nor legal ability to protect themselves from economic loss arising from the negligent conduct of the defendant. The physical capacity is missing because the defendant is not working on or near the plaintiff’s property; the legal capacity is missing because there is no contractual relationship between the plaintiff and the defendant. There is usually the possibility of the plaintiff seeking insurance cover against a foreseeable risk of harm (loss insurance), but also of the defendant obtaining liability insurance. (The issue is not whether either party has insurance, but its commercial availability.) The cases are largely silent as to the circumstances in which that consideration might preclude the existence of a duty of care, although its relevance was rejected by Stephen J in Caltex Oil at 580-581, for reasons more fully explained by Peter Cane, Tort Law and Economic Interests (OUP, 1991) at 460. If in a particular case it were a relevant consideration, there might be a question as to which party bore the onus of establishing the availability of insurance cover (the plaintiff not having it) and the reasonableness of the expectation that the plaintiff should have obtained such cover. Neither party invoked such considerations in this case.

Finally, before leaving the instruction to be obtained from Perre v Apand, it should be noted that this case (with others) reflects the abandonment of the concept of “proximity” as a touchstone of the existence of a duty of care. Nevertheless, the factors which were apt to be included in such an exercise remain relevant. For example, Kirby J in Perre v Apand, in considering the justifiable concern arising from possible liability to an indeterminate class in an indeterminate amount, as stated at [298]:

“It would, for example, allow the law to draw a rational line which would deny recovery to the local store in the Perres’ town whose income had dropped because of the loss to the Perre interests (and hence to the income of its principals and employees) following the loss of the export trade to Western Australia. It would permit exclusion of a legal duty of care to a trucking firm which, before the blight, carried the potatoes to Western Australia. It would exclude consumers in that State, forced to purchase potatoes, or the crisps manufactured from them, from other more distant and expensive suppliers.”

It is convenient next to turn back to the principal case dealing with the liability of builders to successive purchasers of a building, which pre-dated Perre v Apand, namely Bryan v Maloney.

In Bryan v Maloney, the joint reasons of Mason CJ, Deane and Gaudron JJ identified the question to be decided in the following terms (p 617):

“[W]hether, under the law of negligence, a professional builder who constructs a house for the then owner of the land owes a prima facie duty to a subsequent owner of the house to exercise reasonable care to avoid the kind of foreseeable damage which Mrs Maloney sustained in the present case, that is to say, the diminution in value of the house when a latent and previously unknown defect in its footings or structure first becomes manifest.”

The reasoning in support of the existence of such a duty commenced with the proposition that a duty depended upon establishing “a relationship of proximity between the parties with respect to both the relevant class of act or omission and the relevant kind of damage”: at 617. This test was additional to the requirement of reasonable foreseeability which, it was said, would commonly suffice in cases of physical injury, as opposed to pure economic loss. As factors militating against recognition of the relevant relationship, the joint reasons referred to the three indeterminacies identified in Ultramares Corporation and “the perception that, in a competitive world where one person’s economic gain is commonly another’s loss” the imposition of a duty “may be inconsistent with community standards in relation to what is ordinarily legitimate in the pursuit of personal advantage”: at 618. The application of these considerations required that the relationship be seen as “special”: at 619. The joint reasons continued: “Commonly, but not necessarily, they will involve an identified element of known reliance (or dependence) or the assumption of responsibility or a combination of the two”, referring to Sutherland Shire Council v Heyman at 466-468 and 501-502 and Hawkins v Clayton [1988] HCA 15; 164 CLR 539 at 545,576 and 593.

The next stage in the reasoning was that as between the builder and the original owner of the land, the existence of a contractual relationship did not preclude the existence of a duty of care for the purposes of negligence: at 619-620. The reasons noted that the existence of a contract was not irrelevant and might either provide a factor favouring or militating against recognition of a duty of care: at 621. The contract between the builder and the original owner was described as “non-detailed and contained no exclusion or limitation of liability”. Accordingly, it did not preclude a duty of care between the parties to the original building contract. The next step in the reasoning was to accept that the duty extended to economic loss suffered by the original owner: at 623. The fact that the plaintiff was a subsequent owner of the land was seen not to be a critical factor militating against the continued operation of the duty. First, whether the original owner had disposed of the property before the defect became apparent was not material to the existence and extent of the duty. Secondly, had there been physical damage caused to the personal property of the second owner, there would have been liability on the part of the builder. Thirdly, in the absence of any intervening change in circumstances, the house was intended as a permanent structure. Fourthly, there was no inconsistency between the duty and the builder’s legitimate pursuit of his or her own financial interests: at 625-626. Fifthly, the relationship between builder and subsequent owner involved one where the builder assumed responsibility in respect of the building work, in the knowledge that neither the owner nor the subsequent owner would have an opportunity to inspect and test for latent defects and would therefore rely upon the skill and care taken by the builder: at 627.

Two factors have changed since the decision in Bryan v Maloney. First, as already noted, the law in Australia has abandoned “proximity” as the critical test or “conceptual determinant” in identifying the existence of a duty with respect to economic loss: Woolcock Street at [18]. Nevertheless, the salient features now to be considered reflect those referred to in the joint reasons in Bryan v Maloney.

Secondly, although the joint reasons in Bryan v Maloney were careful to identify the significance of the subject matter of the duty, namely a permanent dwelling house, and to distinguish other categories of cases, including the manufacture and purchase of chattels (at 630), in relation to buildings, the joint reasons in Woolcock Street, at [17], dismissed the proposition that there is “a bright line between cases concerning the construction of dwellings and cases concerning the construction of other buildings”. That is not to say that the nature of the building, which will undoubtedly bear upon the relationship between the builder and the original owner or developer, is not a significant factor.

“Since Caltex Oil, and most notably in Perre v Apand Pty Ltd, the vulnerability of the plaintiff has emerged as an important requirement in cases where a duty of care to avoid economic loss has been held to have been owed. ‘Vulnerability’, in this context, is not to be understood as meaning only that the plaintiff was likely to suffer damage if reasonable care was not taken. Rather, ‘vulnerability’ is to be understood as a reference to the plaintiff’s inability to protect itself from the consequences of a defendant’s want of reasonable care, either entirely or at least in a way which would cast the consequences of loss on the defendant.”

The joint reasons also accepted that “notions of assumption of responsibility and known reliance” were relevant in cases of pure economic loss, again referring to Bryan v Maloney: at [26]. While it is true that the joint reasons later stated that it is “not necessary in this case … to attempt to identify or articulate the breadth of any general proposition about the importance of vulnerability” that was not to deny that the element of vulnerability was an important requirement: cf Apache Energy Ltd v Alcoa of Australia Ltd (No 2) [2013] WASCA 213 at [20] (McLure P).

The plaintiff in Woolcock Street failed in circumstances where, like the present case, the existence of a duty had been given separate consideration on the basis of the pleading and agreed facts, the Court noting that the latter “added little to the exiguous allegations of fact made in the pleadings”: at [3]. The pleading contained no reference to facts establishing an assumption of responsibility or known reliance: at [26]. At [31], that point was repeated in a manner which might imply that the plaintiff bore a burden of proof in this regard. Whether that is so is not entirely clear: as the Court noted on more than one occasion, the case being run on the agreed facts and the pleading, the absence of allegations in the pleadings took on a particular significance. On the other hand, the Court also emphasised that liability constituted an exception to a general rule, namely that damages for pure economic loss are not recoverable “if all that is shown is that the defendant’s negligence was a cause of the loss and the loss was reasonably foreseeable”: at [21]; see also [22] and [34].

The parties in Woolcock Street, as appears from [34] sought neither to overrule Bryan v Maloney, nor to expand its operation. The plaintiff failed because it did not bring itself within the principles established inBryan v Maloney, but not because the building was not a dwelling.

In a practical sense, vulnerability may have three aspects, namely inability to –

(a) control or influence the physical events which gave rise to the loss;

(b) negotiate a contractual arrangement imposing liability on the defendant, or

(c) obtain insurance against the economic loss suffered.

In most of the cases in which a claim has succeeded or been permitted to proceed, there has been a lack of control over the physical events which involve negligence: for example, the diseased crop of potatoes on the neighbour’s property in Perre v Apand; control of the ruptured pipeline in Caltex Oil andApache Energy.

So far as the second element is concerned, the question of contractual protection may arise even though there was no contractual relationship between the plaintiff and the defendant. Thus, for example, in Barclay v Penberthy [2012] HCA 40; 246 CLR 258, the principal plaintiff, Nautronix (Holdings) Pty Ltd suffered economic loss as a result of the death of and injury to a number of its employees as a result of an aircraft crash. The crash resulted from the negligent conduct of an engineer (Mr Barclay) and the pilot (Mr Penberthy). Nautronix did not have a contract with either of those individuals, but it did have a contract with the company, Fugro Spatial Solutions Pty Ltd, which owned and maintained the defective aircraft and employed Mr Penberthy as the pilot.

The joint reasons in the High Court stated that the “relevant principles” had been considered inWoolcock Street and were “not in dispute”: at [42]. In the Court of Appeal of Western Australia, Nautronix lost on the basis that it could have negotiated a term in its charter contract with Fugro to protect itself against pure economic loss: at [46]. The joint reasons (French CJ, Gummow, Hayne, Crennan and Bell JJ) noted at [47]:

“In response, counsel for Nautronix pointed to the absence of evidence that it could have negotiated successfully for the inclusion of such a term in the Charter Agreement. Further, in order to establish the existence of a duty of care owed to Nautronix for which Fugro was vicariously liable, it was not incumbent upon Nautronix to establish that it could not have bargained with Fugro for a particular contractual provision. The presence or absence of a claim in contract would not be determinative of a claim in tort.”

Heydon J accepted that the pilot’s potential liability was not indeterminate and that, as he already owed a duty of care to the individual passengers, a duty to avoid economic loss to Nautronix would not have impaired the legitimate pursuit of his interests: at [86]. He nevertheless held that no such duty arose because Nautronix had failed to prove that it could not have negotiated a relevant warranty from Fugro: at [87]. Heydon J considered that the approach of the plurality reversed the burden of proof.

Kiefel J noted the same issue at [177], referring to the view of the Court of Appeal that Nautronix could have negotiated terms with Fugro whereby the latter accepted liability for such loss in the event of negligence. Kiefel J concluded that such a conclusion, namely “that Fugro would have agreed to such a term”, was “not open”.

In any event, the circumstances of the present case are far removed from the cases in which there is a direct contractual relationship between the tortfeasor and the party harmed. There was no submission that the appellant could in some way have protected itself by contract so as to impose liability on the respondent.

As to the third element, the inability of the plaintiff to insure against economic loss, there has been little exploration of this issue in the authorities and it will be considered further below.

(e) proportionality

As noted at [20] above, there should not be a disproportion between the nature of the defendant’s conduct and culpability and its exposure to make good losses suffered by others. These factors were recognised by Stephen J in Caltex Oil at 573 and by Lord Oliver of Aylmerton in Caparo Industries Plc v Dickman [1990] 2 AC 605 at 633, as adopted by Gleeson CJ in Perre v Apand at [5]; and [108] (McHugh J); Johnson Tiles at [940], Gillard J quoting Fleming, The Law of Torts (9th ed) p 196 – see now (10th ed, 2011) at [8.60] – dealing with relational or secondary victims.

(f) ordinary business conduct

In Perre v Apand, at [335], Hayne J referred to the need to avoid the imposition of liability for “ordinary business conduct”. What Hayne J had in mind, in the circumstances of that case, was further explained at [345]-[350]. The matter was approached by asking whether the conduct the subject of the proposed duty of care would have been tortious if carried out deliberately. The importance of this approach is to ensure that the careful limits constructed around liability for deliberate interference in the commercial activities of another are not outflanked by an expanding duty of care. Examples were given at [350] in the following terms:

“Approaching the matter in this way (by asking what would have been the position if the conduct had been engaged in deliberately) is not inconsistent with the cases in which a duty of care to avoid pure economic loss has been found to exist. Three kinds of cases will serve to make good that proposition. First, if a misrepresentation causing economic loss is made with knowledge of its falsity rather than negligently, the party making the representation is liable for deceit. Secondly, if the dredge in Caltex Oil had deliberately set out to break the pipeline it would have been liable for procuring breach of existing contracts for supply or transport of the hydrocarbons carried in the pipeline. Thirdly, if the solicitor in Hill v Van Erp had intentionally sought to depart from her client’s instructions, she would have been guilty of various forms of professional misconduct. The examples could be multiplied.”

A further example might be drawn from the law relating to “economic duress”, where this Court has concluded that the concept of “duress” is limited to threatened or actual unlawful conduct: Australian & New Zealand Banking Group Ltd v Karam [2005] NSWCA 344; 64 NSWLR 149 at [66]. So understood, as Hayne J expressly recognised, the test is negative in effect: that is, it may exclude a duty of care in some situations in which other factors would have militated in favour of a duty: Perre v Apand at [346]. However, there is a question as to whether it should extend to exclude circumstances where, in accordance with established commercial practice, losses are left where they fall, so that, for example, building owners are expected to have loss insurance and building contractors will price their services accordingly. This was an issue expressly addressed by the trial judge.

A factor of importance in this regard is whether the harm suffered is likely to arise only as a result of a particular form of negligent conduct, or whether other causes may be foreseen. In the latter case, it may be that commercial interests will be protected by other means, or the risks will simply be endured. As explained by Lord Denning MR in Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd [1973] QB 27 at 38, a case involving the interruption to the supply of electricity:

“This is a hazard which we all run. It may be due to a short circuit, to a flash of lightning, to a tree falling on the wires, to an accidental cutting of the cable, or even to the negligence of someone or other. … Such a hazard is regarded by most people as a thing they must put up with – without seeking compensation from anyone. Some there are who instal a stand-by system. Others seek refuge by taking out an insurance policy against breakdown in the supply.”

This analysis was applied by Gillard J in Johnson Tiles, with respect to commercial and industrial gas customers at [1036ff]. The judge noted the possibility of contracting with the gas supplier to obtain a warranty of supply, but dismissed the option as “not feasible”: at [1045]. Gillard J secondly considered the possibility of a backup supply and, whilst finding it an available option, appears not to have determined whether or not it was reasonable for business customers to take that step (given the cost), because the preferred commercial option appears to have been loss insurance: at [1068]-[1070]. Despite the remarks of Stephen J in Caltex Oil with respect to the irrelevance of insurance, its availability may be significant in circumstances where, as with supply of utilities, interruption may result from many causes other than negligence on the part of the supplier. Gillard J accepted that the availability of insurance was relevant to the issue of vulnerability: at [1103]. There was evidence before him that appropriate insurance was readily available and he accepted that “the insurer is in an excellent position to make an accurate assessment of its risk and determine the extent of the cover”: at [1105]. This conclusion appears to have been a significant factor in rejecting the existence of a duty of care: at[1110].

(2) Salient features in the present case

The phrase “salient features”, as a description of the factors which may be relevant to determining whether a duty of care exists, appears to derive from the judgment of Stephen J in Caltex Oil (at 576) and adopted by Gummow J in Perre v Apand (at [198]): see Kirby J in Woolcock Street at [164]. InCaltex Refineries (Qld) Pty Ltd v Stavar [2009] NSWCA 258; 75 NSWLR 649 at [103] Allsop P set out a checklist of “salient features”, which were said not to be exhaustive and was not discriminating as to relevance or weight in particular circumstances; further, similar ideas can be expressed in different ways.

In the present case, the following elements are to be assumed:

(a) the respondent was negligent in its construction of the building in the respects particularised in the schedule of defects;

(b) those defects (or at least some of them) were “latent” in the sense that they could not have been discovered by a purchaser exercising reasonable care;

(c) the defects were caused by conduct of the respondent before the registration of the strata plan;

(d) the defects were not trivial or insignificant, but were of a kind which required rectification by a responsible owner, and

(e) the defects arose in the common property and were therefore within the responsibility of the appellant.

The factors relied upon by the appellant as a basis for a finding of liability against the builder were as follows:

(a) the economic loss suffered as a consequence of the latent defects was reasonably foreseeable to a party in the position of the builder;

(b) exercising reasonable skill and care in the construction of the building in accordance with the contractual specifications was a responsibility which the builder took upon itself;

(c) the developer relied upon the builder to exercise such skill and care and indeed obtained contractual warranties that it would;

(d) the registration of the strata plan creating the appellant was an inherent part of the development with respect to which the respondent agreed to design and construct the building – at least with respect to the common property there was no question of an indeterminate class of persons to whom the builder might be liable: there was only one known body corporate, being a creature of statute;

(e) the scope of the liability of the builder with respect to the defects was the same as the scope of its liability to the developer under the contract;

(f) being a creature of statute, the appellant had no ability to negotiate the terms upon which it undertook its functions with respect to the strata plan, and

(g) there was no statutory regime inconsistent with the imposition of liability on the builder in the circumstances of the case.

The factors relied upon by the respondents in resisting the duty of care were as follows:

(a) to find a duty of care in these circumstances would be an extension of the general law;

(b) to find a duty would be to impose on the builder a “transmissible warranty of quality” (adopting language used by Brennan J in dissent in Bryan v Maloney, but traceable to Lord Keith of Kinkel in Murphy v Brentwood District Council [1991] AC 398 at 469) which is a matter for the legislature, not the courts, because of the economic impact of such a step;

(c) the only relevant indicium of a duty in the present case is that economic loss is a reasonably foreseeable consequence of negligence by the builder, but that is not a sufficient basis for establishing a duty;

(d) to the extent that a statutory duty exists with respect to residential building work, pursuant to the Home Building Act, but not to commercial buildings, it would be inappropriate for the Court to expand the statutory scheme to an area where the legislature decided it should not operate, and

(e) the appellant was not in any relevant sense vulnerable, because it was the consequence of a sophisticated commercial arrangement between two well resourced commercial entities, namely the developer and the Stockland Group, which were well able to negotiate on equal terms with any company tendering to design and construct the building, in relation to liability for defects.

Many of these factors require little by way of explication, the real questions relating to their application in the present circumstances. Four matters, however, do call for further analysis, namely:

(a) the contractual relationship between the developer and the builder;

(b) the contractual relationship between the developer and the Stockland Group;

(c) the statutory scheme with respect to strata plans, and

(d) the statutory scheme for protection of successive owners of residential dwellings.

(a) contractual relationship: developer and builder

On 5 November 1997 the developer and the builder (then Multiplex Constructions Pty Ltd) executed an agreement in accordance with the Australian Standard General Conditions of Contract For Design and Construct AS4300 – 1995. Part B of Annexure A to the agreement contained special conditions.

The broad statement of obligations was contained in cl 3 under the heading “Nature of contract” and in particular cl 3.1 which provided:

“3.1 Performance and payment

The Contractor shall execute and complete the work under the Contract in accordance with the requirements of the Contract.

The Principal shall pay the Contractor –

(a) for the work which the Principal accepted a lump sum, the lump sum; and

(b) for work for which the Principal accepted rates, the sum ascertained by multiplying the measured quantity of each section or item of work actually carried out under the Contract by the rate accepted by the Principal for the section or item,

adjusted by any additions or deductions made pursuant to the Contract.”

The builder’s primary obligations were set out in cl 4, headed “Warranties”, cl 4.1 of which provided:

“4.1 Contractor’s Warranties

Without limiting the generality of clause 3.1, the Contractor warrants to the Principal that the Contractor –

(a) at all times shall be suitably qualified and experienced, and shall exercise due skill, care and diligence in the execution and completion of the work under the Contract;

(b) subject to Clause 9, shall engage and retain the Consultants identified in the Contractor’s tender and who are suitably qualified and experienced;

(c) has examined and carefully checked any Preliminary Design included in the Principal’s Project Requirements and that such Preliminary Design is suitable, appropriate and adequate for the purpose stated in the Principal’s Project Requirements;

(d) shall execute and complete the Contractor’s Design Obligations and produce the Design Documents to accord with the Principal’s Project Requirements …; and

(e) shall execute and complete the work under the Contract in accordance with the Design Documents so that the Works, when completed, shall –

(i) be fit for their stated purpose; and

(ii) comply with all the requirements of the Contract and all Legislative Requirements.”

The Contractor shall use the materials and standards of workmanship required by the Contract. In the absence of any requirement to the contrary, the Contractor shall use suitable new materials and proper and tradesmanlike workmanship.”

There were provisions for dealing with defective material or work but cl 30 ended with the statement that nothing in it should “prejudice any other right which the Principal may have against the Contractor arising out of the failure of the Contractor to provide material or work in accordance with the Contract”.

There was an obligation imposed on the contractor to carry out rectification work during the defects liability period (cl 37), which was specified as 52 weeks (Annexure A, item 44). Clause 42 provided for the issue of a “final certificate” by the superintendent under the contract, the effect of which was identified in the following terms (cl 42.6):

“Unless either party, either before the Final Certificate has been issued or not later than 21 days after the issue thereof, serves a notice of dispute under Clause 47, the Final Certificate shall be evidence that the Works have been completed in accordance with the terms of the Contract and that any necessary effect has been given to all the terms of the Contract which require additions or deductions to be made to the Contract Sum, except in the case of –

(a) fraud, dishonesty or fraudulent concealment relating to the work under the Contract or any part thereof or to any matter dealt with in the said Certificate;

(b) any defect (including omission) in the Works or any part thereof which was not apparent at the end of the Defects Liability Period, or which would not have been disclosed upon reasonable inspection at the time of the issue of the Final Certificate; or

(c) any accidental or erroneous inclusion or exclusion of any work, plant, materials or figures in any computation or any arithmetical error in any computation.”

There were extensive provisions for insurance, including a requirement that the contractor maintain professional indemnity insurance for a period of four years after the issue of the final certificate: cl 21 and Annexure A, item 34. Nothing was said to turn on the detail of the provisions relating to insurance. Item 11 in Annexure A identified the documents containing the principal’s project requirements which included the documents provided for in item 10, “Preliminary Design”. Taking these together, the lists of documents was as follows:

(i) a preliminary design, including the DA [development application] drawings and specifications and the BA [building application] drawings and specifications;

(ii) the project brief, including a photographic record of the display suite as at August 1997;

(iii) exchanged sale contracts, and

(iv) standard sales contracts.

Part B of the annexure contained special conditions (“sc”) which contained a general description of works at sc 87 in the following terms:

“The Works may be generally described as a 26 level building (including lower ground floor and roof plant room) containing 109 residential apartments, 165 serviced apartments, meeting rooms/function facilities, a gymnasium and swimming pool, landscaped roof terraces, a restaurant and coffee shops at ground level, plus 197 basement parking spaces over 5 basement parking levels, and are more fully described in the Project Brief.”

Some of the details were varied over time, but not in a way which affected the accuracy of the overall description. Under the heading “Construction of Building” the following obligations were imposed on the contractor:

“55 The Contractor must

(a) cause the Building to be constructed in general accordance with the Development Consent (including, without limitation, the plans and specifications in the Development Application);

(b) cause the Serviced Apartments Parcel to be constructed in general accordance with the Serviced Apartments Floor Plan;

(c) cause the Serviced Apartments Parcel to be finished in general accordance with the Serviced Apartments Finishes; and

(d) install in each of the Serviced Apartments the FF&E Package (as amended by the Trade Off List) relevant to the particular Serviced Apartments.”

The FF&E package set out in precise detail the items to be included in each apartment. The special conditions also referred to the services schedule to the deed, which specified with precision the electrical, water, fire, hydraulic and telecommunication services to be provided. The contractor gave undertakings to perform all its obligations under the contract: sc 93-95.

The contractor was obliged to register the serviced apartment strata plan, the strata management statement and the serviced apartments by-laws: sc 65. The principal agreed not to enter into any contract of sale in relation to the building unless in the form of the standard sales contract which was exhibited to the special conditions and contained two versions, one for serviced apartments and one for residential apartments: sc 89. The terms were in the standard form for a Contract for the Sale of Land – 1992 edition, together with additional provisions to which were annexed a number of documents, including a draft by-law, a draft strata management plan and statement and the schedule of finishes. Although the schedule of finishes was not annexed to the copy of the contract in the appeal papers, it may be inferred that the relevant schedule of finishes was that annexed to the deed between the developer and the Stockland Group, and provided to the builder. Under the contract to sell a serviced apartment, the vendor (the developer) was obliged to cause the property “and the Common Property” to be finished in accordance with the schedule of finishes and “in a proper and workmanlike manner”, before completion: cl 32.1. The purchaser was not allowed, before completion, to serve a notice of any defects or faults in the property “other than Special Faults”,: cl 32.4. Clause 32.7 was in the following terms:

“The vendor must repair in a proper and workmanlike manner, at the vendor’s expense, within a reasonable time after the applicable written notice has been served on the vendor, any defects or faults in the Common Property due to faulty materials or workmanship (excluding minor shrinkage and minor settlement cracks) of which written notice is served on the vendor by the Owners Corporation within seven months after the date of registration of the Strata Plan. The Owners Corporation may not serve notice on the vendor of defects or faults on more than 3 occasions.”

Notice of special faults could be served on more than three occasions: cl 32.6. The term “Special Fault” was defined to mean a fault or defect in the property which:

(a) is structural, or

(b) because of its nature requires urgent attention; or

(c) may cause danger to persons in the property; or

(d) makes the property uninhabitable.

The vendor was required, on registration of the strata plan, to cause the appellant to effect all insurances required by the Strata Schemes Management Act: cl 33.8.

Three broad propositions can be derived from this material, relevant to the existence or otherwise of a duty of care owed by the builder to the appellant. First, the builder was fully conversant with the arrangements between the developer and the Stockland Group and was itself responsible for ensuring the registration of the relevant strata plan, which would give rise to the existence of the appellant: sc 65. It also knew of the intention of the developer to sell the apartments “off the plan”, that is before the construction work was completed and before the strata plan was registered. Indeed, the builder was entitled to be informed of the progress with sales: sc 88. It was also aware of the contractual arrangements by which apartments were sold. In no relevant sense was the appellant an indeterminate entity, nor was its legal identity unknown to the builder. To the extent that the identity of ultimate purchasers of the serviced apartments were relevant, they were not known, but the class was determinate and the contractual terms contained in the sale contracts were known to the builder and could not be varied without its approval: sc 89-91.

Secondly, there is no doubt that the builder, the developer (and the Stockland Group) were sophisticated commercial entities engaged in a development worth more than $55 million. The contractual documentation ran to several hundred pages. It was detailed and precise. The contract between the builder and the developer contained numerous special conditions, as did the standard form contract for sale of each serviced apartment. At the moment of registration of the strata plan the developer controlled the owners’ corporation and, as the vendor under the sale contracts, was in a position to impose obligations on the appellant. On the other hand, it was not in its commercial interest to create in the appellant rights against itself, at least to the extent that it could not pass on any financial liability to the builder.

Thirdly, although the contractual arrangements between the developer and the builder, and between the purchasers of lots and the developer, provided mechanisms by which identified defects in the building work could be rectified, there were no particular provisions dealing with latent defects, and, in particular, no provisions limiting liability with respect to latent defects.

(b) contractual arrangements: developer and the Stockland Group

The “Deed of Master Agreement” dated 11 August 1997, involved the developer on the one part and three companies in the Stockland Group on the other. Clause 4 of the agreement mirrored cll 55-57 in the special conditions of the agreement between the developer and the builder, with the qualifications that it was the developer who undertook to the Stockland Group to cause the building to be constructed and it was Stockland which acknowledged the basis on which the building was designed and intended to be built. Similarly, the developer undertook to Stockland to install the relevant services in the serviced apartments and to procure their fitout “in a proper and workmanlike manner”: cll 5.2 and 6.1. The developer undertook to register the strata plan, the strata management statement and the serviced apartments by-law instrument.

One of the Stockland companies, Park Hotel Management, agreed to take leases of the serviced apartments and operate a serviced apartment business to “at least four-star standard”: cl 10. To effect that purpose, the developer was required, on or before the registration of the serviced apartments strata plan, to deliver to Park leases for each serviced apartment and relevant car spaces, executed by it as lessor: cl 9.2. The unsold apartments would then be sold by the developer to investors on the basis that Park would operate the serviced apartment business as lessee of each apartment: cl 25.

These arrangements complete the contractual picture already outlined above. The only additional consequence which should be identified is that the master deed created an interest in Stockland in the final construction and presentation of the apartments which was reflected in changes to the proposed finishes, and with respect to details of the services, made at its behest.

(c) statutory provisions – strata title

Pursuant to s 11 of the Strata Schemes Management Act, the owners of the lots in a strata scheme constitute a body corporate, referred to elsewhere in the Act as the “owners corporation” (being the term used in s 8 and defined in the Dictionary), but named, as is the appellant, by reference to the registered number of the strata plan. (The term “owner” is defined in the Dictionary to the Strata Schemes Management Act as the owner of the relevant estate in a lot in the strata plan being, in this case, a serviced apartment.) It has already been noted that the existence of the appellant as the body corporate in which the common property was vested was a consequence of the registration of the strata plan: so much follows from the operation of s 8 of the Strata Schemes Management Act. That section also provides that the body corporate for a strata scheme “has the principal responsibility for the management of the scheme”: s 8(2). The relevant estate or interest in the common property vests in the body corporate upon registration of the plan: Strata Schemes (Freehold Development) Act, s 18(1). The functions of the “owners corporation” are set out in Ch 3 of the Strata Schemes Management Act. They are described, in overview, in s 61 in the following terms:

61 What are the key management areas for a strata scheme?

(1) An owners corporation has, for the benefit of the owners:

(a) the management and control of the use of the common property of the strata scheme concerned, and

(b) the administration of the strata scheme concerned.

(2) The owners corporation has responsibility for the following:

(a) maintaining and repairing the common property of the strata scheme as provided by Part 2,

…

Pursuant to s 62(1), the owners’ corporation must “properly maintain and keep in a state of good and serviceable repair the common property”.

The nature of the interest held by the body corporate is further defined as being “held by the body corporate as agent” for the proprietors of the lots the subject of the strata scheme: Strata Schemes (Freehold Development) Act, s 20. The nature and status of an owners’ corporation has been the subject of consideration in a number of cases. It is sufficient to refer to the reasoning of Spigelman CJ inOwners – Strata Plan No 43551 v Walter Construction Group Ltd [2004] NSWCA 429; 62 NSWLR 169. Spigelman CJ (with the agreement of Ipp and McColl JJA) addressed a submission that because the owners’ corporation was said to hold its interest in the common property as an “agent” it could not sue in its own name. The Chief Justice stated at [42]:

“In my opinion, the word ‘agent’ in s 20 and s 24 is not used in the technical sense of the law of agency. The characterisation of the relationship for purposes of determining standing to sue turns on an assessment of the whole statutory scheme, including the powers and duties with respect to common property set out above. There is a tension between the use of the word ‘agent’ and of the words ‘beneficial interest’ in s 24(2). The fact that the statute vests title in the owners corporation is particularly significant.”

The Chief Justice accepted that the owners or proprietors of lots were the beneficial owners of the common property, suggesting that the owners’ corporation held the property as a form of statutory trustee. The Chief Justice concluded at [46]:

“The institutions of trust and agency are not mutually exclusive. It is a distinguishing characteristic of the former that a trustee, unlike an agent, must have trust property vested in it. Where an agent has actual title to property, then the agent will be a trustee, albeit one who is bound to follow the directions of the principal with respect to the property.”

None of this was in dispute in the present case: rather, the point of departure between the parties was whether the appellant was properly characterised as “vulnerable” in the sense discussed above, for the purposes of determining whether it was owed a duty of care by the builder. Broadly speaking, the appellant submitted it was vulnerable because of the manner of its creation and because it had no ability to control the work undertaken by the builder, nor to carry out any appropriate inspection or investigation before acquiring the common property. The respondent’s submission, in broad terms, was that the appellant was the alter ego of the beneficial owners of the lots which were, at the point of registration of the strata plan, vested in the developer. Accordingly the appellant, on that view, was no more vulnerable than the developer. It will be necessary to return to these submissions.

(d) statutory provisions: residential building work

Part 2C of the Home Building Act commenced on 1 May 1997. It applied to “residential building work” done under a contract made on or after the commencement date: s 18A. The warranties to be applied in such a contract included a warranty that the work “will be performed in a proper and workmanlike manner and in accordance with the plans and specifications set out in the contract” and that the materials will be “good and suitable for the purpose for which they are used and that, unless otherwise stated in the contract, those materials will be new”: s 18B(a) and (b). It is further expressly provided that a person “who is a successor in title to a person entitled to the benefit of a statutory warranty under this Act is entitled to the same rights as the person’s predecessor in title in respect of the statutory warranty”: s 18D(1).

The appellant did not assert that it was entitled to the statutory warranties to be found in Part 2C of theHome Building Act. There is, accordingly, no need to consider in detail the content of the warranties. What was relied upon was the fact that the legislature had provided statutory protection in respect of building work, but had limited its operation, so as to exclude work other than residential building work. Because, in common parlance, an apartment may be seen as a form of temporary residence, in contradistinction to a factory, shop or commercial premises, it is necessary to identify why the present development is not covered.

The application of Pt 2C in the present case turned on the definition of “residential building work”. That phrase was defined to mean any work involved in “the construction of a dwelling”: s 3(1). “Dwelling” was defined:

dwelling means a building or portion of a building that is designed, constructed or adapted for use as a dwelling (such as a detached or semi-detached house, transportable house, terrace or town house, duplex, villa-home, strata or company title home unit or residential flat).

● It includes any swimming pool or spa constructed for use in conjunction with a dwelling and such additional structures and improvements as are declared by the regulations to form part of a dwelling.

● It does not include buildings or portions of buildings declared by the regulations to be excluded from this definition.

The Home Building Regulation 1997, which commenced on 1 September 1997 contained both inclusions and exclusions. Thus, cl 5 (so far as relevant) provided:

5 “Dwelling” – certain structures and improvements included

For the purposes of the Act the following structures and improvements are declared to form part of a dwelling when constructed for use in conjunction with a dwelling:

(a) parts of a building containing more than one dwelling (whether or not the building is also used for non-residential purposes), being stairways, passageways, rooms, and the like, that are used in common by the occupants of those dwellings, together with any pipes, wires, cables or ducts that are not for the exclusive enjoyment of any one dwelling,

…

(c) if non-residential parts of a building containing one or more dwellings give support or access to the residential part – the structural elements of the non-residential parts giving such support or access ….

The following are declared to be excluded from the definition of dwelling for the purposes of the Act:

(a) a boarding house, guest house, hostel or lodging house,

(b) all residential parts of a hotel or motel,

…

(f) a house or unit designed, constructed or adapted for commercial use as tourist, holiday or overnight accommodation ….

The concession that the serviced apartments did not fall within the definition of “residential building work” rested on the exclusion contained in cl 6(f) (and possibly (b)). Whether those exclusions imply that such buildings would otherwise fall within the concept of a “dwelling” as defined in the Act, or depend upon the inclusions achieved by cl 5 was not a matter addressed in submissions. Further, there is, of course, doubt as to the extent to which and circumstances in which the Regulation can be used to construe the Act. The Act was relevant in the present case, according to the respondent, because it indicated a statutory expansion of the common law to allow for a form of “transmissible warranty of quality” extending protection to successors in title, but only in respect of residential building work. As that part of the present development which is the subject of the serviced apartments strata plan did not constitute residential development work, the Home Building Act revealed a deliberate legislative intent not to extend its beneficial protections to the owners of such property.

The appellant submitted that the argument rested on an assumption that the legislation expanded the general law and also upon an assumption that no general law duty arose in the present case. Nothing further was to be derived from a consideration of the terms of the Home Building Act, as it provided no basis for deciding whether a general law duty existed apart from the Act.

(3) Reasoning of primary judge

(a) determining a separate question

There were two stages in the reasoning of the primary judge in rejecting the claim of the appellant that the builder owed it a duty of care. The first was that the existence of a duty of care should be determined separately from and before the determination of all other questions: at [4](1). The reasoning in support of that conclusion was set out at [19]-[32]. It need not be reviewed because there was no challenge to what was, in effect, an order under Uniform Civil Procedure Rules 2005 (NSW), r 28.2. Nevertheless, as in Woolcock Street, it is necessary to record the potential difficulties which arise from this approach.

The primary judge stated that the determination of the question was addressed by reference to agreed facts and did not require the Court to proceed on the basis of assumed facts: at [23]. The relevant facts were set out at [33]-[64] and related solely to an analysis of the contractual material and the statutory provisions which have been discussed above. Account may also have been taken of the nature of the defects, discussed at [65]-[71], which has also been addressed above. The element of agreement was therefore limited to the concession as to the nature of the defect: see [12] above.

In these circumstances, the principal factual material which was missing was an analysis of the nature of the defects and whether they could properly be considered “special defects” as described in the sale agreements, or were defects which the developer had no obligation to remedy under the sale agreements. However, it appears to have been implicit in the concession and the manner in which the case was run that the defects were such as would have required remedial work under the building contract had they been discovered by the developer prior to the certificate of final completion, or within the 52 weeks of the defects liability period under the contract. (Whether such issues would in fact be in dispute in the lengthy hearing which was anticipated in the event that a duty of care of was established is unclear from the description given by the primary judge.)

(b) existence of duty of care

The second stage was to consider the existence of a duty of care. By way of background, McDougall J noted that he had, in an earlier case involving a building known as “The Star of the Sea” addressed a similar claim: Owners Corporation Strata Plan 72535 v Brookfield Ltd [2012] NSWSC 712 (“The Star of the Sea”). That case had features which are not present in this case. In particular, the judge accepted in “The Star of the Sea” that the owners’ corporation had the benefit of statutory warranties, with the result that a somewhat different question arose, namely whether there was a general law duty which extended beyond the statutory warranties. In any event, the reasoning was less expansive than that which followed in the present case.

In this case the conclusion that no duty of care existed under the general law rested upon three bases, namely:

(1) because the building contract was negotiated “at arm’s length between parties of equal standing, who are able to bargain for and obtain the benefits that they seek, and to pay the price that they think appropriate” there was no room for a tortious duty of care: at [89]-[90] and [104];

(2) the existence of the statutory warranties under the Home Building Act, but not extending to the present case, implied the conferral of a benefit “that the legislature appears to have withheld as a matter of deliberate policy choice”: at [94]-[103], and

(3) there was no authority which extended to such a case and it was not appropriate for a judge at first instance to expand the obligations of a builder under the general law: at [88], [91] and [105].

The primary judge eschewed making findings on the question of “vulnerability”: at [106]. However, at least on one view, the conclusion that no duty of care arose because of the contractual relationship itself involved an aspect of the analysis of vulnerability although, again on one view only, it ignored other aspects of the analysis required in assessing vulnerability.

It is convenient to evaluate these steps in the reasoning sequentially. As to the third point, it is necessary to consider whether it is accurate to describe the appellant’s right as unsupported by authority, but it is unnecessary to comment on the role of a trial judge in such a case.

(i) no room for a tortious duty?

A central plank of the reasoning was the absence of any need for a tortious duty owed by the builder to the original owner, being the developer, where the contractual arrangement between the builder and the developer dealt comprehensively with their relationship.

In concluding that there was neither reason nor room for the imposition of a tortious duty of care as between the builder and the developer, the primary judge placed significant weight on a passage from the joint reasons (of Gleeson CJ, McHugh, Gummow and Hayne JJ) in Astley v Austrust Ltd [1999] HCA 6; 197 CLR 1 at [47] where, having noted that obligations in contract were bargained, whereas the duty of care under the law of tort was imposed, the joint reasons continued:

“Rather than ask why the law should imply such a term in a contract for professional services, it might be more appropriate to ask why should the law of negligence have any say at all in regulating the relationship of the parties to the contract? The contract defines the relationship of the parties. Statute, criminal law and public policy apart, there is no reason why the contract should not declare completely and exclusively what are the legal rights and obligations of the parties in relation to their contractual dealings.”

The primary judge accepted that that reasoning, articulated in relation to a solicitor and client contract, should apply to the design and construct contract in the present case, concluding at [90]:

“Where the parties have negotiated in full their rights and obligations, there is no reason for the law to intervene by imposing some general law duty of care.”

Not only does the passage extracted from Astley not support that conclusion, but it is premised on an assumption which is inconsistent with it. The passage appears under the heading “Concurrent liability” and explains how the rights and obligations of solicitor and client have come to be the subject of obligation in both tort and contract. In the preceding paragraph, at [46], the joint reasons set out a passage from the opinion of Lord Goff of Chieveley in Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 at [193]:

“My own belief is that, in the present context, the common law is not antipathetic to concurrent liability, and that there is no sound basis for a rule which automatically restricts the claimant to either a tortious or a contractual remedy. The result may be untidy; but, given that the tortious duty is imposed by the general law, and the contractual duty is attributable to the will of the parties, I do not find it objectionable that the claimant may be entitled to take advantage of the remedy which is most advantageous to him, subject only to ascertaining whether the tortious duty is so inconsistent with the applicable contract that, in accordance with ordinary principle, the parties must be taken to have agreed that the tortious remedy is to be limited or excluded.”

In the paragraph from which the extract was taken in Astley, the reasoning commences:

“History and legal principle combine to indicate that the conclusion of the House of Lords in Henderson is the correct view.”

After noting the differences between the two causes of action, the joint reasons concluded at [48]:

“The evolution of the law of negligence has broadened the responsibility of professional persons and requires them to take reasonable care and skill even in situations where a contractual relationship cannot be established. But given the differing requirements and advantages of each cause of action, there is no justification in recognising the tortious duty to the exclusion of the contractual duty.”

Thus, the reasoning in Astley accepted that there were concurrent duties but that the plaintiff was entitled to rely upon its cause of action in contract, to which the Wrongs Act 1936 (SA) did not apply, so as to avoid apportioning liability for contributory negligence. Further, the contrary view would be inconsistent, in the present context, with the reasoning in Bryan v Maloney and its reliance on the statement with respect to the liabilities of an architect in Voli v Inglewood Shire Council [1963] HCA 15; 110 CLR 74 at 84, in the judgment of Windeyer J (with whom Dixon CJ and Owen J agreed) that the obligation to exercise due care, skill and diligence “can be said to arise either from a breach of his contract or in tort”. The conclusion that there can be concurrent duties does not preclude a finding that, in a particular case, the general law duty has been excluded or limited by the contract between the parties. Indeed such a provision was described as “commonplace” in Astley at [85]. However, to determine whether that is the correct analysis in a particular case requires consideration of the terms of the agreement.

There was no express term in the contract, to which this Court was taken, which even refers to, let alone regulates or excludes, a general law duty of care in tort. Rather, cl 4.1(a), which was stated to be without limitation to the generality of the contractor’s obligations under cl 3.1, reflected at least part if not all of the relevant duty of care which would be imposed under the general law. Clause 37, dealing with “Defects liability” imposed, for a period of 52 weeks, a separate obligation on the contractor to rectify any defects or omission in the work under the contract “existing at the Date of Practical Completion”. Clause 37 empowered the superintendent to direct the contractor to “promptly rectify any omission or defect in the work under the Contract for which the Contractor is responsible”. It did not purport expressly, or by necessary implication, to exclude any liability for defects or omissions which might arise otherwise than during that period, whether under contract or under the general law.

The primary judge further stated that “contractors in the position of Brookfield price their work, and more generally undertake contractual obligations, with reference, among other things, to the contractual and statutory warranties by which they are bound”: at [104]. That proposition may be accepted, but its ramifications are less clear. Half of the building to be constructed comprised residential apartments which, it appears to have been accepted, involved “residential building work” covered by the statutory warranties in the Home Building Act. There was no evidence as to whether the respondent took the view that different contractual obligations operated with respect to the other half of the building. The standard conditions in the 1995 agreement pre-dated the enactment of Pt 2C of the Home Building Act. However, cl 86 of the special conditions was headed “Statutory Warranties” and provided an acknowledgment by the contractor “that certain statutory warranties apply to the Works”. The word “Works” was defined in the standard terms to mean “the whole of the work to be executed in accordance with the Contract”: cl 2. Although the reference to “statutory warranties” was non-specific, there was no evidence that any statutory warranties other than those under the Home Building Act were applicable: the relevant implication is that the contractor proceeded on the basis that those warranties applied with respect to the whole of the building. Accordingly there was no basis in the present case to think that the imposition of a duty of care owed to the appellant affected the commercial basis upon which the respondent priced its work.

There is a further assumption, which must be accepted on the basis of current authority, that no general law duty of care can arise with respect to successive owners unless there was a general law duty owed to the original owner with whom the builder contracted to construct the building. Where the builder and the developer contracted out of any general law duty of care, a question would arise as to the effect of such a term which does not arise in the present case. It would not follow that the builder would not owe a duty to persons not party to the contract, for example persons who came onto the premises and were injured when a negligently constructed wall collapsed on them: see Wilkinson v Law Courts Ltd [2001] NSWCA 196 at [21] and Hoffmann v Boland [2013] NSWCA 158 at [156]-[170]. The principle that parties to a contract can exclude a general law duty of care has no operation with respect to persons who are not party to the contract. Their cases must be established according to principles of tort law, bearing in mind the different circumstances which operate with respect to pure economic loss, as opposed to personal injury. In any event, these questions do not arise in the present case. The critical issue which does arise is whether, if one focuses on vulnerability, the fact that successive owners (and in particular the appellant) may be vulnerable is relevant in circumstances where the original owner is not.

(ii) expanding the statutory scheme?

Before turning to that question (which was not addressed by the primary judge) it is convenient to look at the other basis in principle upon which he relied in rejecting the claimed duty of care. That involved the proposition that the appellant “is inviting the courts to go where the legislature did not”: at [94].

The analysis undertaken in support of that conclusion depended upon a reading of the Home Building Act and the Home Building Regulation set out above, on two bases. The first basis was that the regulation reflected legislative policy, in particular “to exclude, from the regime of protection given to dwellings under the Home Building Act, a number of categories of dwelling, including in effect dwellings used for the purposes of overnight accommodation”: at [102]. The general rule precludes reliance on delegated legislation as a means of construing a statute. As explained in Master Education Services Pty Ltd v Ketchell [2008] HCA 38; 236 CLR 101 at [19] (Gummow ACJ, Kirby, Hayne, Crennan and Kiefel JJ) with respect to an industry code made pursuant to Part 4B of the Trade Practices Act 1974 (Cth):

“The Court of Appeal relied upon the terms of cl 11(1) of the Code in concluding that entry into a contract was prohibited by the Act. It may be useful to read together regulations and the Act with which they were made, in order to identify the nature of a legislative scheme which they comprise. That is not a warrant for the use of the Code to construe, and expand, the terms of s 51AD, in particular by reference to the nature of the language of cl 11(1).”

In the present case, although it can be said that the legislature envisaged the need for refinement of the definition of “dwelling” it cannot be said that the statute was based on any assumption that the proper construction of that term must reflect the meaning given by the proposed regulation. Accordingly, it was wrong in principle to derive a statutory intention underlying the legislation from the terms of the Regulation: see also McKee v Allianz Australia Insurance Ltd [2008] NSWCA 163; 71 NSWLR 609 at [6](Allsop P) and at [95] (in my judgment); and see DC Pearce and RS Geddes, Statutory Interpretation in Australia (2011, 7th ed) at [3.41]. The exercise in the present case involved more than using the Regulation to identify the nature of the scheme: it used the precise terms of the Regulation to define the statutory intention.

Part 2C of the Home Building Act was introduced against a general law background which included the principle established in Bryan v Maloney. It reconfigured that liability in three ways. First, it defined the warranties as to quality of work to the benefit of which both the original owner and a successor in title were entitled. Secondly, by implying those warranties into the contract and conferring the same rights on a successor in title, it avoided the need for a separate tortious liability to be established. Thirdly, it rendered void any provision of an agreement which purported to restrict or remove those rights: s 18G.

Separately, Pt 2C addressed the problem of the owner/builder and that of the subcontractor by treating each of those persons as having done work for the successor in title under a contract: s 18C. (That aspect is of no present consequence.) What is of consequence is the removal of a right to contract out of the statutory warranties. While the Act is silent as to whether the principle in Bryan v Maloneyextends to constructions other than residential homes, it is clear that the limit of the legislative intention to change the law may be seen to focus upon the nature and scope of the remedy and, which might be a significant variation of principles governing commercial contracts, the prohibition on contracting out. It is undoubtedly the case that these changes were deliberately not introduced with respect to building work other than “residential building work”.

Whether general law principles in tort are in any way affected by the operation of Pt 2C may be doubted. Importantly for present purposes, the acceptance in Woolcock Street that no bright line can be drawn between dwellings and other buildings requires determination of whether, and if so to what extent, a duty of care with respect to pure economic loss extends beyond the facts of Bryan v Maloney: see Woolcock Street at [17]. That question is not helpfully addressed by considering those reforms which were and those reforms which were not made by the introduction of Pt 2C into the Home Building Act.

(iii) novelty of liability?

The third basis on which the trial judge declined to uphold a duty of care was that to do so would be to “impose a novel duty of care” in a commercial transaction. That may, however, be to overstate the expansion for which the appellant was contending. In Woolcock Street, there was no challenge to the principles established in Bryan v Maloney, the joint reasons rejecting “a bright line between cases concerning the construction of dwellings and cases concerning the construction of other buildings”: at[17]. In those circumstances, a court should, applying principles relevant to defining the limits of a duty of care for pure economic loss, address the claim made by the appellant in its terms.

Similar claims have been upheld in other common law jurisdictions. Contemporaneously with Bryan v Maloney, the Supreme Court of Canada upheld a claim in tort for pure economic loss with respect to defective construction of an apartment building, which required the removal of the exterior cladding of the building, after a significant section broke loose: Winnipeg Condominium. Giving judgment for the Court, La Forest J stated at [36]:

“In my view, the reasonable likelihood that a defect in a building will cause injury to its inhabitants is also sufficient to ground a contractor’s duty in tort to subsequent purchasers of the building for the cost of repairing the defect if that defect is discovered prior to any injury and if it poses a real and substantial danger to the inhabitants of the building. … [T]he duty in tort serves to protect the bodily integrity and property interests of the inhabitants of the building.”

La Forest J further stated at [48]:

“The tort duty to construct a building safely is thus a circumscribed duty that is not parasitic upon any contractual duties between the contractor and the original owner. Seen in this way, no serious risk of indeterminate liability arises with respect to this tort duty. In the first place, there is no risk of liability to an indeterminate class because the potential class of claimants is limited to the very persons for whom the building is constructed: the inhabitants of the building. The fact that the class of claimants may include successors in title who have no contractual relationship with the contractors does not, in my view, render the class of potential claimants indeterminate. As noted by the New Jersey Supreme Court in Aronsohn v Mandara, 484 A 2d 675 (1984), at p 680, ‘[t]he contractor should not be relieved of liability for unworkmanlike construction simply because of the fortuity that the property on which he did the construction has changed hands’.”

McHugh J noted in Woolcock Street that the New Zealand courts have long accepted liability in negligence for economic loss resulting from defective construction work: at [54]-[55]. The authority of those cases was accepted by the Privy Council in Invercargill City Council v Hamlin [1994] 3 NZLR 513, despite inconsistency with the approach adopted by the House of Lords in Murphy v Brentwood District Council.

Liability in similar circumstances was upheld by the Court of Appeal of Singapore in RSP Architects Planners & Engineers (Raglan Squire & Partners FE) v Management Corporation Strata Title Plan No 1075 [1999] 2 SLR 449. Like Winnipeg Condominium, this case involved dislodgment of a part of the external cladding on the building, which revealed defective construction work and the need for extensive rectification. The judgment of the Court (delivered by LP Thean JA) gave careful consideration to the correct approach to the determination of duty in relation to pure economic loss, noting the developments in the United Kingdom and also referring to the judgment in Bryan v Maloney: at [16], [23]-[25] and [31], in terms to which only Gaudron J might take exception.

The Court applied the reasoning accepted in an earlier decision, RSP Architects Planners & Engineers v Ocean Front Pte Ltd [1996] 1 SCR 113 in which the Court of Appeal had upheld the existence of a duty between the developers and their successors in title to the common property, the management corporation. In each case, a duty of care was found to exist. In these proceedings, relating to the same development, the architects were joined by the developer, although the defects in the common property appear not to have been the same as those considered in the later case. The Court identified the relevant question as “whether the developers in the construction of the condominium and in particular the common property owed to the management corporation a duty to exercise reasonable care so as to avoid causing to the management corporation the kind of damage the latter sustained, namely, the costs and expenses incurred or which would be incurred in making good the common property, ie pure economic loss”: at [27]. After reviewing the English authorities, the Court gave extensive consideration to the decision in Bryan v Maloney: at [49]-[55]. Noting that the more recent English authorities had not been followed in Canada (referring to Winnipeg Condominium), Australia or New Zealand, and taking into account certain statutory obligations of the developers to the management corporation, when it came into existence, the Court upheld the finding of the trial judge that there was a duty of care with respect to defects in the common property: at [74]-[75].

In Victoria, the Appeal Division of the Supreme Court upheld the existence of a duty of care owed by a civil engineer to the owner and occupier of land on which a swimming complex was to be constructed, in circumstances where liability extended to pure economic loss for a latent defect: Pullen v Guteridge Haskins & Davey Pty Ltd [1993] 1 VR 27 (Brooking, Tadgell and Hayne JJ). Following Bryan v Maloney, the Victorian Court of Appeal (Maxwell P, Ormiston and Ashley JJA), upheld a finding that a surveyor and his employer owed a duty of care to subsequent owners of land which, when breached, gave rise to a liability for pure economic loss: Moorabool Shire Council v Taitapanui [2006] VSCA 30; 14 VR 55.Moorabool shared characteristics with both Bryan v Maloney and Woolcock Street. Like Bryan v Maloney, it involved a residential dwelling; like Woolcock Street, the respondent was not the builder, but a surveyor whose position was not dissimilar to that of the engineer in Woolcock Street.

(4) Vulnerability

As McHugh J explained in Woolcock Street, at [71], in an approach not materially different from that adopted in the joint reasons:

“I do not think that the ratio decidendi of Bryan v Maloney applies to the case of commercial premises. The ratio can be put no higher than that the builder of a dwelling house owes a duty to a subsequent purchaser to take reasonable care to avoid reasonably foreseeable decreases in its value arising from the consequences of latent defects caused by the house’s defective construction. … That is not to say that the reasoning in Bryan v Maloney – or by analogy its material facts – may not lead to the conclusion that the common law recognises an identical or similar duty in respect of the builder of commercial premises. That requires further analysis. But it does mean that the ratio decidendi of Bryan v Maloney does not automatically determine the result of this appeal.”

That further analysis, having particular regard to the concept of “vulnerability”, must be undertaken to determine the present case. In that regard it is necessary to return to the concept of vulnerability. Although the joint reasons in Woolcock Street did not address the matter in these terms, it is apparent from Bryan v Maloney that the first question to be answered is whether the builder owed a duty with respect to pure economic loss to the original owner. Thus, although expressed in terms of “a relationship of proximity”, the joint reasons in Bryan v Maloney at 622-623 stated:

“Clearly enough, a relationship of proximity existed between Mr Bryan [the builder] and Mrs Manion [the original owner] with respect to ordinary physical injury to Mrs Manion or her property with the consequence that Mr Bryan was under a duty to exercise reasonable care in relation to the building work, including the footings, to avoid a foreseeable risk of such injury. A more difficult question is whether that relationship of proximity and consequent duty of care with respect to the building work extended to mere economic loss by Mrs Manion of the kind ultimately sustained by Mrs Maloney [the subsequent owner] when the inadequacy of the footings became manifest.”

The judgment concluded that there were “strong reasons” for acknowledging the existence of the relationship between the builder and the first owner: at 624. The reasoning accepted that “the ordinary relationship between a builder of a house and the first owner with respect to that kind of economic loss is characterised by the kind of assumption of responsibility on the one part (ie the builder) and known reliance on the other (ie the building owner) which commonly exists in the special categories of case in which a relationship of proximity and a consequent duty of care exists in respect of pure economic loss”: at 624.

Their Honours then reasoned that the link between the builder and the subsequent owner was the house itself, which they described as a “substantial” link, the house being “a permanent structure to be used indefinitely and, in this country, … likely to represent one of the most significant, and possibly themost significant, investment which the subsequent owner will make during his or her lifetime”: at 625. There was no reason to suggest that foreseeability, responsibility and reliance were any different in the case of a subsequent owner.

If one is required to ask whether the original owner could have protected itself against such liability, the short answer is that it did: it entered into a contract with the builder which imposed on the builder responsibility for carrying out the work with due care and skill. So far as practicable, the contract, including the special conditions, ensured that the builder would comply with its obligations.

There is no evidence of the significance of the project to the developer, but nor was there in Bryan v Maloney. It may similarly be assumed that a project involving design and construction costs in excess of $55 million was a very significant financial commitment.

The defects, so far as one can tell, do not involve complaints about the design stage of the project, but rather the execution of the building works. There was a superintendent appointed under the design and construct contract, but there can be no doubt that the developer relied upon the expertise, care and honesty of the builder in performing its obligations under the contract. Whatever may be possible in theory, there is no suggestion that in practical terms the contract was not administered in accordance with usual industry practices, which inevitably involve reliance by the developer on the exercise of responsibility by the builder. There is no reason in these circumstances to treat the developer as otherwise than vulnerable in the relevant sense. The fact that the vulnerability arose with respect to its commercial interests rather than any personal interests of individuals, was not suggested to be a relevant consideration. If the imposition of liability on the builder in those circumstances was thought to impose an additional commercial cost, it must equally be assumed that to require the owner to check every step taken by the builder in executing the contract must impose a very significant commercial cost on an owner.

The next question concerns the vulnerability of the appellant. The respondent submitted that the appellant, at the point of registration, was not so much a successor in title to part of the building as the alter ego of the developer, which was then the owner of all allotments and hence the beneficial owner of the common property. However, on the basis that there can be no liability to a successor in ownership unless there had been equivalent liability to the original owner, this argument cannot assist the respondent. In other words, one does not ask whether the appellant was owed a duty of care unless it has already been established that the developer was owed such a duty. If the developer was owed such a duty, presumably it did not cease to be owed such a duty at the point in time at which the appellant came into existence, on the assumption that the developer was then still the equitable owner of the relevant property.

The second stage in the argument is based on the assumption that the appellant is to be viewed as a true successor in title to the interests of the developer. However, it was vulnerable with respect to latent defects in the same way that the developer was. Indeed, its position was weaker than that of the developer, which may have had some opportunity to carry out inspections during the course of the construction and before the defective materials were no longer examinable. Once the proposition that the developer had such realistic opportunities to protect itself in a physical sense, it follows that the position of the appellant can be no better.

The third stage in the argument is that the investors themselves who bought the respective lots from the developer could have protected themselves under the contracts of purchase by insisting upon a clause covering liability for latent defects. Alternatively, they could have carried out physical inspections of a kind which might have revealed the latent defects in question.

The suggestion of physical inspection may be put to one side: if that was not a practicable option for the developer or the appellant, the investors, who had a more limited interest in the building, cannot realistically be expected to carry out such inspections. Nor would they have any right, individually, to remove all render or masonry forming part of the common property, for example.

The question of legal protection is more complicated. The standard sale contracts did not include such protection. They were agreed between the builder and the developer and the builder retained a contractual right to be informed of and to approve any change in their terms. It seems inconsistent with the concept of vulnerability, in relation to the existence of a liability on the part of the respondent in tort, to say that the purchasers were not vulnerable because they could have insisted upon a contractual right as against the builder or the developer.

The concept of protection against pure economic loss with respect to latent defects in a building might be thought to refer to the taking out of insurance. However, there is no authority which identifies this as a significant element in the concept of “vulnerability”. That is understandable, because it has a “chicken and egg” quality to it. It is true that a property owner may be expected to take reasonable steps to obtain insurance, if such is reasonably available, in respect of its own liabilities and any potential for unrecoverable loss. However, if the builder is liable for such loss, it is reasonable to expect that it would obtain appropriate insurance. The duty of self-protection through insurance should properly be determined after identifying where liability lies, rather than as part of the exercise of determining where liability lies.

On the basis that the builder did owe a duty of care to the developer and to the body corporate in which the common property was vested on registration of the strata plan, the next question is the extent of that liability. The appellant not being party to the contract between the builder and the developer, it would not be correct to impose a tortious duty equivalent to the contractual obligations of the builder to the developer. For example, if the developer contracted with the builder to use particular materials or materials of a particular durability and quality, it does not follow that the duty of care imposed by law would extend to such matters. On the view adopted by La Forest J in Winnipeg Condominium, liability extends to defects which are “dangerous” and which therefore reasonably require rectification “to protect the bodily integrity and property interests of the inhabitants of the building”: at [36]. Liability for pure economic loss is seen as a corollary to the potential liability of a builder for physical damage to persons or property. Once the latter liability is recognised, it is appropriate to accept liability for economic loss, being the cost of steps reasonably taken to mitigate the risk of physical damage or personal injury.

The scope of liability so identified would extend to defective cladding or defects in other parts of the common property which could give rise to personal injury. It would also cover the expense of rectifying defects which could give rise to damage to property, including the property of the lot owners. Thus, if window frames are defective and tend to leak, or there are problems with the plumbing or other services, which may give rise to water damage within the property, such defects would fall within the scope of liability. On this approach, the liability of the builder in tort to the appellant would include the kind of “special faults” identified in the contract and referred to at [64] above, but might extend further. Thus, if a leaking window was liable to cause damage to carpets or other floor coverings, there is no reason to exclude such a defect from the scope of liability.

(5) Conclusion

Accepting that the general law does not impose a general duty of care to avoid economic loss, and that the decision in Bryan v Maloney does not in terms dictate the outcome in the present case, there are significant features which militate in favour of the existence of a duty of care covering loss resulting from latent defects which (a) were structural, (b) constituted a danger to persons or property in, or in the vicinity of, the serviced apartments, or (c) made them uninhabitable. The existence of a duty expressed in those terms should be accepted.

(6) Costs

At trial, McDougall J ordered that the appellant pay the respondent’s costs, to be assessed on the ordinary basis up to 24 March 2011 and thereafter on an indemnity basis: Owners Corporation Strata Plan 61288 v Brookfield Multiplex [2012] NSWSC 1586 at [40]. The appellant challenged the order that it pay indemnity costs, submitting that the offer of compromise should have been ignored as derisory and insufficient to amount to a genuine offer of compromise. The appellant’s success on the appeal requires that the costs order made by the trial judge be set aside in any event.

The costs of the first stage of the trial (the determination of the separate question) should be determined by the judge hearing the outstanding issues. The respondent must pay the appellant’s costs in this Court.

Orders

The following orders should be made:

(1) Allow the appeal and set aside the orders made in the Equity Division on 10 October 2012.

(2) Answer the separate question –

The first respondent owed the appellant a duty to exercise reasonable care in the construction of the building to avoid causing the appellant to suffer loss resulting from latent defects in the common property vested in the appellant, which defects (a) were structural, or (b) constituted a danger to persons or property in, or in the vicinity of, the serviced apartments, or (c) made those apartments uninhabitable.

(3) Order the first respondent to pay the appellant’s costs in this Court.

(4) Direct that the judge determining the outstanding issues in the proceedings determine the proper order as to the costs of the trial of the separate question.

MACFARLAN JA: I agree with the judgment of Basten JA, and the additional remarks of Leeming JA. I add the following observations.

First, one of the primary judge’s principal reasons for finding that no common law duty of care existed in favour of the appellant was that Part 2C of the Home Building Act was of limited reach only and did not confer any relevant rights on the appellant. In my view this circumstance did not militate against the imposition of a common law duty of care as there is nothing in the Act to suggest that it was intended to abrogate any common law rights of action. Furthermore the passages in the 1993 Report of Commissioner Dodd, which preceded the enactment of Part 2C of the Act, and in the relevant Second Reading Speech to which the Court was referred, if anything, implied that the Part was intended to supplement, rather than limit, existing rights.

Secondly, the respondent argued that the appellant did not show that it had been vulnerable, in the sense that it had been unable to protect itself from the consequences of the respondent’s lack of care (Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16; 216 CLR 515 at [23]), because it did not show that it could not have bargained with the developer for contractual protection. One answer to this argument is that the appellant only came into existence on registration of the strata plan and was not a conventional successor in title which acquired the property in question under a contract with the previous owner (here the developer). A further answer is as follows.

The existence of a contract between the developer and a builder for the latter to construct a building does not preclude the existence of a duty of care owed by the builder to the developer as similar contractual and tortious rights may exist concurrently (Astley v AustrustLtd [1999] HCA 6; 197 CLR 1 at[44] – [48]; see also Bryan v Maloney[1995] HCA 17; 182 CLR 609 at 619 – 620). Further, it was not suggested in Astley that proof of the existence of a tortious duty of care concurrent with contractual obligations was dependent upon proof by the party to whom it was owed that it could not have negotiated with the party subject to the duty for contractual protection against the loss that came to be suffered. This being the case, it is difficult to see why a successor in title, or a party otherwise related to that to whom the duty of care was owed, should have to show that it could not have negotiated contractual protection in order to establish that a duty of care was owed to it.

The decision in Barclay v Penberthy[2012] HCA 40; 246 CLR 258 confirms that it need not do so. In that case, employees of a charterer of an aircraft were killed when the aircraft crashed. The charterer claimed from the aircraft’s pilot, with whom it did not have a contract, damages for the loss suffered as a result of those deaths. The Western Australian Court of Appeal found that the pilot did not owe a duty of care to the charterer because the charterer “could have protected itself from the pure economic loss, which it suffered from the injury to its employees, by appropriate terms in its charter contract” with the owner requiring the owner to accept liability to the charterer for pure economic loss suffered by the charterer as a result of injury to its employees (at [46]).

On appeal to the High Court, the plurality, comprising five justices of the Court, rejected this approach and upheld the decision of the trial judge in favour of the charterer. In doing so, it appeared to accept that it was not incumbent upon the charterer to establish that it could not have bargained with the owner for a particular contractual provision (at [47]). The plurality added that “[t]he presence or absence of a claim in contract would not be determinative of a claim in tort”, citing Astley v Austrust and Fleming’s The Law of Torts 10th ed (2001) [8.350] (ibid). Barclay is binding on this Court and should be followed, notwithstanding that it is not easy to reconcile this aspect of the decision with the observations of the plurality in the earlier decision of Woolcock Street Investments at [31].

LEEMING JA: I have read and agree with the reasons and conclusions of Basten JA, and the observations made by Macfarlan JA.

To my mind, there was and is a superficial attraction to the builder’s submission that the duty of care for which the owners corporation contended was not easily reconciled with the statutory setting. But that attraction is dispelled by a more careful analysis.

The effect of the Strata Schemes Management Act is to require a special company, created by State law, to come into existence, necessarily after the building contract has been substantially performed. Statute vests legal title to particular property – the common property – in that new company. The owners corporation is expressed to hold that property as “agent”, which gives rise to a relationship between it and the owners of the individual lots of trustee and beneficiary, or analogous to trustee and beneficiary:Owners – Strata Plan No 43551 v Walter Construction Group Ltd [2004] NSWCA 429; (2004) 62 NSWLR 169 at [43]-[48]. The owners corporation has, speaking generally, statutory obligations to manage and control the use of the common property, maintain and repair it, and the power to levy contributions from lot owners to pay for its performance of those obligations.

The essence of the legislative regime is that whenever a developer and builder contract to carry out a development with a view to lodging a strata plan for a strata scheme, an artificial person, distinct from the lot owners, will come into existence and become the owner of part of the building. The original owner of the lots created will be the developer, and the legislation contemplates an “initial period” until such time as lots become owned by third parties such that the sum of their unit entitlements is at least one third of the aggregate unit entitlement (see definition of “initial period” in the Dictionary), following which the developer must convene a first annual general meeting within two months (see s 14 and Schedule 2 clause 2).

There is nothing antithetical in those provisions to a duty of care owed by the builder to that special creature of statute which is intended by builder and developer to come into existence following the performance of the builder’s obligations. The legislative scheme is such that the owners corporation is much more vulnerable than, say, a company which owns land on which is to be erected a company title building. To the contrary, what would be strange, to my mind, would be an imputed legislative intention to deny to that corporation the ordinary rights legal persons enjoy at common law.

Moreover, Basten JA has shown why nothing turns for present purposes on the warranties created by regulations made under the Home Building Act on which the owners of the upper storeys of the building may sue.

Finally, one reading of parts of the reasoning of the primary judge (at [105]-[106]) is that it is not for judges at first instance to accede to an argument for a novel duty of care. I respectfully disagree. The law is dynamic; as Street CJ said, “the plain fact is that legal principle is constantly evolving”: Reg v Unger [1977] 2 NSWLR 990 at 995. From time to time new classes of tortious liability will be identified (and indeed from time to time hitherto accepted classes of liability will be rejected). I see no reason why what might be called a “test case” may not be run and won at first instance, so long as binding authority does not preclude it; it is not true that nothing should ever be done for the first time: Harris v Digital Pulse Pty Ltd [2003] NSWCA 10; (2003) 56 NSWLR 298 at [26] and [109]. In any event, what the owners corporation seeks is not even a “non-radical change” in the law (cf Harris at [457]) but the application in a novel case of principles governing the existence of a duty of care, in an area of the law where there is, as McHugh J has observed, “inherent indeterminacy”: Burnie Port Authority v General Jones Pty Ltd (1994) 179 CLR 520 at 593.